When reading about ways to invest in real estate with a self-directed IRA, it can often seem like the only avenue open to potential investors is to pay the full amount for a property with their IRA. Investors with a small IRA can feel like they have no recourse if they want to invest in real estate except to continue contributing and wait until their IRA has a large enough cash amount.

Not so.

Potential investors with a small IRA have options when they want to invest in real estate. The three most popular are partnering, leveraging, lending the IRA.

 

  • Partnering the IRA — Investors can partner their IRA with a number of partners in order to go in on a property together. The IRA can partner with other IRAs, an investor’s money, or even personal funds. The IRA will own a portion of the property proportional to the percentage of the full amount they paid. In addition, the IRA will receive a proportional amount of the income and pay for their portion of expenses.
  • Lend the IRA — If an investor is looking to make a more passive investment, they can lend the money in their IRA to another investor.  In acting as a source of capital, they can still make returns on the property without having to be as involved with the management and upkeep of the property. The IRA holder gets to set the terms and rate for the loan, as well as having the loan secured by the property.
  • Leverage the IRA — If lending and partnering don’t appeal, investors can choose to leverage their IRA. Investors that choose this route must find a lender willing to give them a non-recourse loan. Securing this type of loan means the lender can only recover the property and the IRA’s equity in it, not the IRA or account holder’s personal assets. Regulations require that the loan go to the IRA, not the account holder.

As we’ve demonstrated, it is entirely possible for small IRAs to invest in real estate. Insufficient capital for the entire purchase of a property shouldn’t keep account holders back from investing in real estate. Any of these options also allow younger account holders to begin more actively investing in real estate if they are aware of them.